Lessons for the 'rest'

Palm oil fruit bunches at a dealer collection centre near Johor. Industrial policies in MIT states have been effective in upgrading industries. For example, in Malaysia, there is substantial learning in palm oil processing and electronics. REUTERS PIC

OF the 10 fastest growing economies since 1960, eight are in East Asia. Two main competing explanations claimed to explain this regional concentration of catch-up growth since the late 20th century, often referred to as the East Asian miracle.

The dominant “neo-liberal” Washington Consensus, sought to establish a minimalist “night-watchman” state, attributed this exceptional regional performance to macroeconomic stability, public goods provision, and openness to trade and investment.

Meanwhile, more heterodox economists focused on the need for states to adopt pragmatic, experimental “trial and error”, selective approaches to overcome market and coordination failures in order to accelerate growth, especially through industrialisation.

In this view, the developmental states of Northeast Asia used their “embedded autonomy” vis-a-vis the private sector to accelerate technological catch-up and achieve rapid growth. But what then is to be learnt from the more modest and mixed progress in Southeast Asia?

The conventional wisdom about Southeast Asia, particularly Malaysia, Indonesia and Thailand (MIT), is that states there lacked the strength, autonomy and embeddedness vis-a-vis the private sector to successfully adopt Northeast Asian development strategies.

Selective interventions in MIT were said to be subject to too much rent-seeking and corruption, which were widely believed to have slowed growth elsewhere. But this view does not quite fit the facts, i.e., sustained rapid growth in MIT.

Michael Rock’s Dictators, Democrats and Development in Southeast Asia shows how weaker and less autonomous states in MIT, subject to corruption and rent-seeking, successfully achieved rapid growth by pursuing unorthodox interventionist policies.

MIT, undoubtedly, looks much more like the Rest than Northeast Asia. They are resource rich, but have avoided the “resource curse”. They have high levels of ethnic heterogeneity, but have avoided related growth tragedies.

Like the Rest, they have poorer governance — weaker and less competent states, with less autonomy from the private sector, more corruption and rent-seeking. Yet, they have avoided the growth slowdowns and lost decades experienced by many of the Rest.

So, how did MIT succeed while the Rest did not? Economic take-offs in MIT were preceded by rentier capitalist political elites gaining state control and pragmatically implementing industrial development strategies.

The successes were certainly not primarily about free trade, laissez faire, or being FDI-friendly and export-oriented. They were also not easy, took time, and encountered political resistance, instability and violence.

Development did not emerge on the political agenda until elites needed to protect their conservative “nation-building” projects. To consolidate power, they recognised that development and growth were in their long-term political interest.

The inability of political elites to successfully complete their nation-building projects is therefore crucial to understanding “failed states”. Such conservative nation-building projects were typically led by “centre right” coalitions composed of monarchies, the military, police, bureaucracy and the business elite.

The losers were the Left and popular groups, among others. With the defeat of the Left and histories of openness to foreign trade and investment, elites forged pro-growth political coalitions enabling an open capitalist, but nonetheless interventionist growth strategy to work.

This development strategy was more pragmatic than ideological, and rooted in essentially “experimental”, “muddling through” and “trial and error” approaches.

Thus, even though these were “open economies”, the governments were not dogmatic “free traders”. As MIT governments used both markets and states to sustain growth, development policies were certainly not laissez faire, even though they were capitalist, with states far more interventionist than mere night-watchmen.

MIT states sought to promote domestic capitalists to compete in the global economy.

Such promotion of rentier business elites was reciprocated with “kickbacks” for political elites to secure political support.

The fact that MIT growth was primarily driven by domestic, not foreign investment, has important implications for development policy. MIT's favoured capitalists generally responded by substantially increasing the investment to gross domestic product ratio.

MIT growth was thus investment, rather than export-led.

The shares of manufactures in GDP and exports are larger than expected while export concentration indices are less than believed, suggesting that selective industrial policies worked, albeit unevenly.

This strategy has influenced the size distribution of firms as a small number of very large conglomerates dominate — government-patronised ethnic Chinese conglomerates which dominate the MIT economies and, exceptionally, Malaysia’s government-linked companies.

This political economy “ecosystem” could have failed if MIT governments were not developmentalist, or if the elites were too greedy, or if the private sector did not invest, or if there were no checks or balances.

Ruling political elites in MIT have been opportunistically or pragmatically nationalistic despite quasi-neoliberal rhetoric to the contrary.

They pursued economic development as necessary for regime consolidation, national power and achieving their goals.

Many observers correctly argue that MIT economies have not been consistently good at catching up, which is only to be expected from experimenting.

Nevertheless, their industrial policies have been effective in upgrading some firms and industries.

There is evidence of learning in aircraft, wood processing and automotive industries in Indonesia, and of substantial learning in palm oil processing and electronics in Malaysia, and agro-processing, cement, automotive parts, and component supplies in Thailand.

MIT governments and capitalists also learned from setbacks and failures without necessarily admitting to them, e.g., when governments took too much, or when government incentives failed, and policies had adverse consequences, even if unintended.

Sustaining growth, industrialisation and technological progress remain preconditions for continuing income increases. Yet, all three now seem caught in so-called “middle income traps”. Escaping these traps will depend on the governing elites’ understanding of past progress. IPS

The writer, a former economics professor, was assistant director-general for Economic and Social Development, Food and Agriculture Organisation, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.